Small Restaurants Get Relief from IRS in Adopting Final Tangible Property Regulations

Recently, the IRS released final regulations dealing with repair and capitalization of tangible property under IRC Sec. 162(a) and 263(a) and regulations relating to dispositions under IRC Sec. 168. These regulations are effective for taxable years beginning on or after January 1, 2014. Every business with fixed assets is affected by these new rules; restaurants are especially impacted.

In order to comply with certain portions of the final repair regulations, restaurants may be required to file Form 3115 (Application for Change in Accounting Method) for the 2014 tax year, often with small or zero section 481(a) adjustments. This results in additional tax reporting burden on small restaurants.

To help minimize this burden, on February 13, 2015, the IRS released Rev. Proc. 2015-20 providing small taxpayers with simplified procedures to comply with the final tangible property and disposition regulations. Small business taxpayers may choose a simplified procedure without having to complete and file a Form 3115 or include a separate statement for the 2014 tax return.

Eligible taxpayers: One of two criteria must be met for eligibility:
  • Total assets of less than $10 million or
  • Average annual gross receipts of $10 million or less over the three prior tax years
Advantages of using Rev. Proc. 2015-20:
  • No Form 3115 or statement is required on tax return
  • No need to compute adjustments in years prior to 2014
  • Easier compliance when section 481(a) adjustment is zero
Disadvantages of using Rev. Proc. 2015-20:
  • Cannot file Form 3115 for late partial asset dispositions
  • Lost opportunity for repair or disposition deductions in years prior to 2014
  • No audit protection for years prior to 2014
Rev. Proc. 2015-20 eases the burden for making accounting method changes to comply with the repair regulations for small restaurants that do not have a 481(a) adjustment or do not wish to go back to earlier tax years and apply the final regulation’s methodology. It is important to keep in mind, however, that elections found in the final regulations, such as the de minimis safe harbor and the small taxpayer safe harbor, are not affected by this guidance and will still need to be made on tax returns. Notwithstanding Rev. Proc. 2015-20, some small restaurants may prefer to file a Form 3115 with a favorable section 481(a) adjustment to take advantage of taxpayer-friendly provisions of the final regulations. Therefore, qualifying small restaurants that own a significant amount of assets should carefully evaluate the potential repair and partial disposition tax deductions and audit protection benefits they may be giving up by opting to use the simplified procedures of Rev. Proc. 2015-20 in years prior to 2014.

Read the complete BDO analysis of Rev. Proc. 2015-20.